During the decade of the 1990s many developing countries throughout the world underwent profound transformations of their national economies. These transformations involved the liberalization of trade, an increase in foreign direct investment and the reduction or redefinition of the role of the state in alleviating poverty and promoting welfare. Perhaps no single country epitomizes this transformation more than Mexico. During this decade Mexico signed a sweeping free trade agreement with the United States and Canada forming the second largest trading bloc in the world. Mexico was also one of the largest recipients of total foreign direct investment. Finally, the Mexican government reoriented its strategy of poverty reduction towards more targeted programs aimed at developing the human capital of poor households. The overall goal of this research project is to estimate the effect of these changes on poverty and inequality in a sample of over 100 metropolitan areas. Assessing the impact of economic liberalization on the distribution of income is important not only because inequality is a problem in itself, but because it has also been shown to have important negative consequences for economic development, political stability, health and educational outcomes, and violence. The study will use micro-data samples of the 1990 and 2000 Mexican population censuses to estimate the changes in the income distribution that occurred at the metropolitan level. Information on the level of foreign investment and trade in all manufacturing and service-sector firms operating in a metropolitan area will be obtained from the 1989 and 1999 economic censuses. Fixed-effects models will be used to estimate the effect of economic liberalization on income inequality and poverty over time. A recently-developed decomposition method will allow us to further distinguish the contribution that changes in the returns to foreign investment as well as the sociodemographic characteristics of workers had on the change in income inequality (return effects) from the contribution of changes in the characteristics of workers during the decade (population effects). Second, multilevel models where individual residents are nested within metropolitan areas will be employed to measure the effect that the level of foreign investment and export-oriented production have on the payoffs to education and the gender gap in wages. Finally, geo-coded census tract information from the 1990 and 2000 censuses will be used to measure changes in income segregation and the spatial concentration of poverty over time. No previous study has so thoroughly examined the consequences of economic liberalization on the distribution of income at the local level. Because the economic changes described are not unique to Mexico, the findings from this study have direct implications for other developing countries in Asia and Latin America. [unreadable] [unreadable]